In FY16, the top five — Sun Pharma, Dr Reddy’s, Lupin, Aurobindo and Cipla — ran up a total bill of Rs 3,497 crore in legal and professional costs.

Doing business in regulated markets like the US has become more litigious than ever, involving patentrelated litigation as well as costs related to FDA compliance.

ET INTELLIGENCE GROUP: For Indian pharmaceutical companies, compliance with US Food and Drug Administration norms has emerged as the most critical risk in the past few years. The most dramatic reflection of this is in the way legal and professional costs have surged.

For 135 listed pharma companies, this has jumped threefold to Rs 5,071 crore in past five years, based on their annual reports. India’s biggest drugmaker Sun Pharmaceutical Industries accounts for the lion’s share of this for the year to March as the table makes clear. In FY16, the top five — Sun Pharma, Dr Reddy’s, Lupin, Aurobindo and Cipla — ran up a total bill of Rs 3,497 crore in legal and professional costs.

That exceeds the annual revenue posted by companies such as GSK Pharma (the local unit of the multinational), Ipca Labs and Alembic Pharma. These costs quadrupled for the country’s top five pharma companies last year, with Sun Pharma accounting for half of the total FY16 bill. As regulator of the world’s biggest drug market, the FDA stepped up scrutiny of Indian manufacturers following violations by Ranbaxy that led to a $500-million settlement with the US Department of Justice in 2013.

Sun Pharma acquired Ranbaxy from Daiichi Sankyo in 2014. Doing business in regulated markets like the US has become more litigious than ever, involving patentrelated litigation as well as costs related to FDA compliance.

With a ban on fixed-dose combination drugs and the threat of price controls being extended to more drugs, the environment in India has also turned hostile for pharma companies, leading to the need for heavier legal representation.

Remedial measures to comply with FDA regulations involve the hiring of legal advisers and international consultants like Lachman Consultants, Parexel and Quintiles.

Also, having acquired scale, Indian companies are looking to make acquisitions as they seek to expand into overseas markets. “Besides the cost incurred on regulatory compliance and litigation, Indian companies have been active on the M&A front, both globally as well as in India, which involves them hiring top international and domestic law firms,” said Bhavik Narsana, partner, Khaitan & Co. For instance, in February, Cipla completed the acquisition of US-based Invagen and Exelan Pharma. It was closely followed by Lupin completing the acquisition of US-based Gavis and Sun Pharma acquiring brands in Japan.

Sun Pharma incurred Rs 1,895 crore toward professional, legal and consultancy charges in FY16, about four times the Rs 480 crore it spent on this in FY14. With four plants of the erstwhile Ranbaxy under remediation for compliance with FDA guidelines and its Halol plant having received a warning letter from the regulator, Sun Pharma had to undertake exhaustive compliance-related procedures in the last fiscal year.

Dr Reddy’s spent Rs 555 crore on legal costs in the last financial year, equivalent to 15 per cent of its operating profit. In a May earnings call, the company said it spent $20 million (Rs 130 crore) on hiring consultants on remediation measures related to three factories that received FDA warning letters in November last year.

Wockhardt and Sun Pharma are the two companies for which legal and professional costs were the most as a proportion of operating profit — nearly one-fourth for Sun Pharma and onethird for Wockhardt at Rs 181crore.

Trend may continue

The trend is likely to continue. “Going ahead, the costs are likely to remain at this level,” said DG Shah, secretary general of the Indian Pharmaceutical Alliance (IPA), which through its quality forum is working with six leading companies on transforming the compliance culture.

“The costs visible today are those spent on remediation measures pertaining to one or two facilities,” Shah said. “Over the next four to five years, companies will have to cover all their other facilities to make them FDA compliant with some of the companies wanting to accelerate the implementation across organisation.”

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